The Financial Power of House Hacking

For someone just starting out of the Financial Independence journey, there is one thing that can rev up your investing power – house hacking.

I knew about house hacking the past few years but didn’t step up to the plan until recently. I regret not getting into it sooner.

The difference was thousands of dollars and years of my life.

The concept is pretty simple. You put 3.5% down via FHA for a property that cash flows. The FHA loan allows one to purchase a 1 to 4 unit building. Buy purchasing a multifamily property, the other unit incomes can be used to pay the mortgage and utilities.

For my situation, I had previously been spending about $625 per month in rent and $50 in utilities. That comes out to $675 out of my monthly budget that isn’t going toward investing.

I was able to find a property in my area that was a duplex. I have the place rented out on the other side and have a roommate. That allows me to cover all mortgage, taxes, insurance, utilities, capital expenditures (roof, appliances, etc), and repairs.
This allows me to live for $0 a month. It is actually better than that because I am building equity. So I am actually gaining net worth and my living expenses are $0. This is such a great deal. What is the downside? There are 2 areas

1. Taking the risk.
   
   There are big expenses for properties. If the washing machine goes out, I am buying a new one. If the furnace goes out, I need to fork up the cash for a new one
   
2. Managing a property
   
   Managing a property isn’t too difficult. There are plenty of apps out there to help. I personally use ZenLord for manage the leases and income.There are bad tenants out there and if you are a landlord long enough you will find one. The hassle with dealing with people is part of the deal but can definitely pay off if you so choose

This powerful tool is one of the simplest forms to leverage your living situation into an income producing tool. For many people, this can move their financial independence date up years. However, it does take some sacrifice.

Finding A Deal

I produced a tool based off the bigger pocket’s 4 square method. I call it 5 square as it adds an extra square to input more loan information. I look for a property that, if I were not living in it, cash flows >10% off the start

1. Determine Rental Income
   There are typically 4 sources of income that one can gather from a property
   
   1. Rent. This is the most obvious. When looking for a property, I used both a realtor who is an investor but also RentoMeter. Rentometer is a powerful tool that allows one to get actual data on what rents are going for in your area and your address. It also provides more indepth analysis. I use this to compute rental income for prospective property
      
   2. Laundry. Machines can provide income that needs to be added
      
   3. Storage. This can include both lockers as well as garage storage.
      
   4. Misc Income. Often I put garage income or a RUBS (ratio utility billing system)
      
2. Determine Expenses
   1. Tax
   2. Insurance
   3. Garbage
   4. Electric
   5. Gas
   6. HOA Fees
   7. Lawn/Snow
   8. Vacancy – about 1-5% of rent
   9. Repairs – about 1-5% of rent
   10. CapEx – about 1-5% of rent
   11. Mortgage
       
3. Loan Information
   1. Property Value
   2. Down Payment Percentage
   3. Interest Rate
   4. Length of Loan
      
4. Investment
   1. Closing Cost
   2. Rehab Budget
   3. MIsc
   4. Escrow

That might seem like a lot of information to gather. However, by using Rentometer.com and Realtor.com one can gather this information within a minute or two. It typically takes me 45 seconds to analyze a property with my 5 Square Property Calculator.

The Payout

Now for me, I was just spending $675 a month on living. However, let’s look at that over the course of 30 years at 9% interest. That comes out to be $1.2 million! That really changes the scope of retirement. Now you might say, okay, no one is going to house hack for 30 years. Fair enough. But they might be willing to do that until they are financially independent? For someone making 80k a year just staring out, monthly expenses of $2500, and Financial Free Income of $40k, that will be 13.2 years. However, if they were to save $675 a month and invest that, it would shave 1.2 years off their FiFree date and provide them with equity in real estate.
This can also be used in a house hack chain that can really accelerate your FiFree date. I will be talking more about this strategy soon.